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GIRO XXX
2003 Convention
US D&O and PI
14-17 October 2003
City Hall, Cardiff
Doug Collins
Tillinghast – Towers Perrin
71 High Holborn
London WC1V 6TH
0207 170 2162
GIRO XXX
2003 Convention
US D&O, E&O and Med-Mal Liability
Douglas Collins
14-17 October 2003
City Hall, Cardiff
The D&O Insurance Market
■ Directors & Officers Liability
A. Personal coverage
B. Corporate reimbusement coverage
C. Entity coverage
■ Employment practices liability
■ Fiduciary liability
Public insureds represent the largest share of the
market
Estimated 2002 Distribution of Premium by Segment
By Ownership Type
By Coverage Type
Not for
Profit Fiduciary
10% 12%
For Profit-
Private
20% For EPL D&O
Profit - 28% 60%
Public
70%
2002 D&O Liability Survey
■ Survey of claim and purchasing patterns
■ Reflects market in second half of 2002
■ 2187 US participants
■ 44% - 500 or more shareholders
■ 42% - under 500 shareholders
■ 14% - not for profit
■ Annual update of survey that began over 20
years ago
Claimant distribution varies significantly by
ownership type
Public Private Not for Profit
70% of market 20% of market 10% of market
4%
7%
16%
26%
12%
52% 51%
10% 89%
21%
12%
■ Large average severity shareholder suits dominate the Shareholders
claims against public companies Competitors/Contractors/Other
■ Employee suits dominate claims against private and not-for- Customers/Clients
profit companies
Employees
■ Severity of loss is typically a more significant driver of
profitability for public exposures while frequency of loss is
more of an issue for the profitability of private exposures
Source: 2002 Tillinghast D&O Survey (distribution of number of claims)
Average Claim Severity – For-Profit Risks
18
16
14
Millions of US Dollars
12
10
8
6
4
2
0
1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002
Survey Year
Def ense Indemnit y "Tot al"
Source: 2002 Tillinghast D&O Survey. Severity of claims closed with payment.
Average Indemnity Severity by Claimant Type
30
27
24
Millions of US Dollars
21
18
15
12
9
6
3
0
1990 1992 1994 1996 1998 2000 2002
Survey Year
Shareholder s Employees C ompet it ors C ust omer s
Source: 2002 Tillinghast D&O Survey. Severity of claims closed with payment.
D&O Premium Index – US, For-Profit Only
1000
900
800
700
600
500
400
300
200
100
0
1974 1978 1982 1986 1990 1 994 1 998 2002
Median Average
Source: 2002 Tillinghast D&O Survey.
Full D&O Limits Capacity ($ Millions)
1600
1200
800
400
0
4
5
6
7
8
9
0
1
2
3
4
5
6
7
8
9
0
1
2
98
98
98
98
98
98
99
99
99
99
99
99
99
99
99
99
00
00
00
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
2
2
2
Source: 2002 Tillinghast D&O Survey.
Typical Limits and Retentions
Type / Size Limits Retentions
NFP,
$1m to $10m $5k to $250k
FP< 500sh
FP > 500sh
<$1B mkt $10m to $50m $250k to $1m
cap
FP > $1B mkt
Over $50m $1m to $5m+
cap
Source: 2002 Tillinghast D&O Survey.
D&O Market Premiums have doubled since 2000
Estimated Direct Written Premiums
Growth Drivers
Growth Drivers
$ Billions
10 •• Rapidly increasing
Rapidly increasing
rates
rates
•• Coverage terms and
Coverage terms and
5 availability, which
availability, which
were generally
were generally
broadening during
broadening during
the 1990’s,
the 1990’s,
contracted in 2002
contracted in 2002
1998 1999 2000 2001 2002 2003
Source: A.M. Best; industry press, Tillinghast estimates. Note: These are midpoints of a range
of estimates, e.g., 2000 base range is $4 billion to $6 billion. As D&O financial results are combined with other
liability coverages in the Annual Statement, precise figures are not available.
After several years of deteriorating results, the D&O
market appears to be improving due to significant
rate increases
Estimated Industry Profitability, 1996 – 2003
(by accident/claims-made year) Key Trends
Key Trends
Combined
Ratio •• Increasing claim
140% Increasing claim
frequency and
frequency and
120%
severity changes
severity changes
Breakeven -->105%
100% will partially offset
will partially offset
80% strengthening
strengthening
60%
•• Breakeven based on
Breakeven based on
opportunity cost
opportunity cost
40%
approach
approach
20%
0%
1996 1997 1998 1999 2000 2001 2002 2003
Loss & LAE Ratio Combined Ratio (25% underwriting expense ratio)
Source: Tillinghast estimates of loss ratios. A.M. Best for expense ratios.
Drivers of D&O Performance
■ Legislation, SEC regulations and court rulings
■ Impact of Private Securities Litigation Reform Act of 1995
(“PSLRA”)
■ Sarbanes-Oxley, SEC certification requirement (2002)
■ Changes in loss costs
■ Frequency of class actions
■ Timing and severity of securities claims
■ EPL trends
■ Insured type or behaviour
■ M&A or IPO activity
■ Rating downgrades
■ Restatement of financial results
■ Pricing trends
■ Economic conditions
■ Bankruptcies, layoffs, stock market decline
The E&O Liability Market
Estimated
2001 DWP (000)
"Traditional" Specialty Areas
Lawyers Professional Liability $1,000,000
Accountants Professional Liability 400,000
Architects & Engineers Professional Liability 400,000
Insurance Agents/Brokers Professional Liability 150,000
Subtotal "Traditional" Specialty Areas $1,950,000
Other Miscellaneous Professional Liability $800,000
The Lawyers E&O market totals approximately $1.0
billion, and is serviced by 3 general types of insurers
L a w y e rs E & O
D is tr ib u tio n o f E s tim a te d 2 0 0 1 D W P
N A B R IC O
13%
O ther
" S p e c ia lt y "
C a rrie rs
23%
" T ra d it io n a l"
C a rrie rs
64%
Source: A.M. Best, Marketstance, IMR, industry press, Tillinghast estimates.
A large number of “traditional” carriers write
Lawyers E&O…
A d m ir a l D e e r f ie ld A m e r ic a n E q u it y
C a r o lin a C a s u a lt y E v a n s to n N o r t h la n d
A I G / L e x in g t o n H a rtfo rd /N u tm e g C o lo n y
A I G / N a t io n a l U n io n H a r t f o r d / P a c if ic P r e f e r r e d N a t io n a l
C h ic a g o L ib e r t y M u t u a l S t. P a u l
In te rs ta te
O ld R e p u b lic S ta r
CNA
P h ila d e lp h ia T IG
C h u b b / E x e c u t iv e R is k
R e d la n d Tudor
C la r e n d o n
R o y a l/ D P I C U n it e d N a t io n a l
G r e a t A m e r ic a n
SAFECO W e s tp o rt
T r a v e le r s / G u lf
S c o t t s d a le Z u r ic h
Kem per
Source: Crittenden’s Specialty Coverages Insider and conversations with Tillinghast clients.
In addition, the following are significant Lawyers
E&O “speciality” insurers
American National Lawyers Insurance Reciprocal RRG
Association of Trial Lawyers Assurance RRG
Attorneys Insurance Mutual of Alabama
Attorneys Insurance Mutual RRG
Attorneys Liability Assurance Society RRG
Attorneys Liability Protection Society RRG
Bar Plan Mutual Insurance Company
Florida Lawyers Mutual Insurance Company
Illinois State Bar Association Mutual Insurance Company
Lawyers Mutual Insurance Company
Lawyers Mutual Insurance Company of Kentucky
Lawyers Mutual Insurance Company of North Carolina
Legal Mutual Liability Insurance Society of Maryland
Michigan Lawyers Mutual Insurance Company
Minnesota Lawyers Mutual Insurance Company
Ohio Bar Liability Insurance Company
Oklahoma Attorneys Mutual Insurance Company
Oregon State Bar Professional Liability Fund
Texas Lawyers Insurance Exchange
Wisconsin Lawyers Mutual Insurance Company
Source: NABRICO, AMBest’s, Crittenden’s Specialty Coverages Insider
Small firms comprise the majority of the Lawyers
E&O market
Lawyers E&O
Distribution of Written Premium by Firm Size
Small Accounts (1-19
19% employees)
Medium Accounts (20-
99 employees)
56%
25%
Large/Jumbo Accounts
(More than 100
employees)
Law ye rs E&O
Distribution of Policies Written
by Firm Size
1%
4%
Source: IMR Data
95%
Recent loss ratios for Lawyers E&O have been
similar for NABRICO and traditional carriers
Comparison of Direct Loss & LAE Ratios (Sch. P)
E&O (Other Liability - Claims Made)
1
0.8
Loss Ratio
0.6 NABRICO Carriers
0.4 Traditional Carriers
0.2
0
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
Report Year
Drivers of E&O performance
■ Overall economic outlook
■ Claim activity generally increases in certain practice areas
as the economy slows
■ Lower investment returns increase pressure for rate
adequacy
■ Insured demographics
■ Practice areas/location/firm size/internal controls
■ Evolving case law/jury attitudes/legal trends
■ Specific market conditions
■ Coverage changes
■ Pricing trends
Source: Crittenden’s Specialty Coverages Insider, industry press.
Medical malpractice is the largest professional
liability line, accounting for $6.3 billion in DWP in 2000
Total Commercial Liability Premiums, Excluding Auto Liability
Products Liability
E&O $1.9 Billion
$2.75 Billion
D&O**
$5.0 Billion
Other Liability*
Medical $25.7 Billion
Malpractice
$6.3 Billion
CMP Liability
$9.5 Billion
2000 DWP: $53 Billion
*Consists predominantly of premises and completed operations coverages; also includes umbrella, excess and some non-medical
malpractice professional liability written on an occurrence basis.
**Includes D&O, fiduciary and employment practices liability coverages.
Source: A.M. Best; Tillinghast estimates.
In the Continuing Battle Over Medical
Malpractice Costs, Whom Do You Feel Sorry for?
A. The poor, downtrodden B. The lowly, C. The small, struggling
doctors underpaid lawyers insurance industry
Note: You can only vote for one.
Financial Results
Combined ratios and operating ratios for the line
have deteriorated steadily since 1994
Industry Medical Malpractice Ratios, CY Basis
180%
160%
140%
120%
N/A
100%
80%
60%
40%
20%
0%
1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Combined Operating
Source: A.M. Best.
Financial Results
Reserve redundancies are masking the true deterioration of
results as carriers steadily draw down reserves set aside for
business written in the early 1990s
• Reserves appear to have turned deficient sometime in the past two to three years
Ultimate Projected Loss at Different Valuation Points
Coverage Years 1991 – 2000
130%
120%
110% Valuation Date
Valuation Date
100%
1991
90%
1992
80%
1993
70%
60%
1994
50%
1995
40%
1996
30% 1997
20% 1998
10% 1999
0% 2000
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Coverage Year
Source: A.M. Best’s Aggregates & Averages, Net Loss and DCC Schedule P Part 2 — Occurrence and Claims Made.
The importance and size of alternative markets has
fluctuated over time with changes in market
conditions
Medical Malpractice Premiums
and Premium Equivalents
$ Billions
$14 Commentary
$12.0
$12 $11.3 ■ Total medical malpractice premiums
and premium equivalents contracted
$10
between 1997 and 1999 with rate
$5.6 $4.6
reductions in the traditional markets
$8
causing movement out of ART
$6 market
■ As market conditions have hardened,
$4 premiums are shifting back to the
$6.4 $6.7
alternative markets
$2
■ The number of captives grew
$0 2.4% in 2000 and 5.9% in 2001
1997 1999
Traditional insurance premiums (DWP)
Alternative market* premium equivalents
*Includes off-shore premiums, premiums written by individual state JUAs and amounts paid to fund alternative risk management programs,
such as trusts and risk retention groups.
Source: For alternative market premium equivalents: Conning, “Medical Malpractice Insurance, A Prescription for Chaos,” 2001; For
traditional insurance premiums (DWP): A.M. Best’s Aggregates & Averages, Schedule P Part I.
A substantial portion of the alternative market is
managed through captives domiciled in the Cayman
Islands
Growth in Cayman Captives Health Care Captives in the Cayman Islands
by Type — 2000
600
500
Type of Captive Number Premium Volume Assets
400
Hospital System 126 $680,354,244 $3,900,568,348
300
Physician Group 34 $26,339,037 $169,649,263
200
Long-term Care 20 $41,348,283 $63,382,269
100
Total 180 $748,041,564 $4,133,599,880
0
1994 1995 1996 1997 1998 1999 2000 2001
Health Care Other
Source: Cayman Islands Monetary Authority; Tillinghast estimates.
The physicians market accounts for the largest share
of traditional premiums; health systems typically
utilize alternative mechanisms to manage their
liability exposure
Medical Malpractice Estimated Premium by Type of Customer, 1999
MCOs
Nursing Homes $50 M
$421M <1%
Allied Health Care*
$541M 7%
9%
Physicians
52% (Office-based)
32% $3.1B
Hospitals
$1.9B
In addition to traditional premiums of $1.9 billion, hospitals paid between $4
In addition to traditional premiums of $1.9 billion, hospitals paid between $4
billion and $5 billion to fund alternative risk programs in 1999
billion and $5 billion to fund alternative risk programs in 1999
*Includes all non-M.D. practicioners, with dental being the largest portion.
Source: Conning, “Medical Malpractice Insurance, A Prescription for Chaos,” 2001.
The top 10 writers account for roughly 46% of total
medical malpractice premiums
2000 Direct Written Premium*
Group $Millions $ Total
1 St Paul Companies $575 9.1%
2 MLMIC Group $500 7.9%
3 GE Capital Insurance Group $321 5.0%
4 Health Care Indemnity Inc $243 3.9%
5 CNA Insurance Companies $232 3.7%
6 Zurich/Farmers Group $212 3.7%
7 NORCAL Group $210 3.4%
8 MIIX Group $205 3.3%
9 Doctors Company Ins Group $205 3.3%
10 PHICO Group $182 2.9%
Top 10 $2,911 46%
Top 20 $4,323 69%
Top 30 $5,154 82%
*Calendar year data based on a group (vs. individual company) basis.
Source: A.M. Best’s Aggregates & Averages.
Competitive Landscape
Physician-owned carriers account for half of
traditional medical malpractice premiums
Medical Malpractice Premiums, By Type of Insurer
Health system-
owned Insurer:
15%
Traditional
Carrier:
34%
Physician-owned
Insurer (expanded):
Physician-owned
42%
Insurer (limited):
9%
2000 DWP
$6.3 billion
Sources: Tillinghast analysis of A.M. Best data, based on classification of individual company results reflecting definitions on facing page.
Issues and Opportunities
Rising overall health care costs
YOY Percentage Changes, CPI vs. Medical CPI: 1980 – 2001
16
CPI Medical CPI
14
12
10
8
6
4
2
0
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000
Source: Bureau of Labor Statistics.
Financial Results
Changes in the judicial environment and the health
care system in general have led to a significant rise
in malpractice awards and settlements
U.S. Median Medical Liability Awards and Settlements
($000)
1,000
800
Settlements
600 Awards
400
200
1993 1994 1995 1996 1997 1998 1999 2000
Source: Jury Verdict Research.
Sample large rewards: 1997 versus 2000 - 2001
1997
1997 2000 ––2001
2000 2001
June, Queens County, NY $27,570,327 January 2001, Dallas County, TX $269,000,000
March, Boone County, KY $23,530,746 May 2001, Bronx County, NY $108,000,000
November, Queens County, NY $19,275,466 January 2001, Philadelphia County, PA $100,000,000
September, Dade County, FL $18,924,000 May 2001, Nassau County, NY $75,000,000
May, LA County, CA $15,700,000 March 2000, Los Angeles County, CA $60,686,150
April, Oakland County, MI $15,317,000 January 2001, Philadelphia County, PA $49,594,684
December, Philadelphia County, PA $15,000,000 August 2000, Kings County, NY $41,444,531
June, Cuyahoga County, OH $14,460,000 June 2000, TX $32,676,410
May, US District, HI $12,381,670 September 2000, Escambia County, FL $31,100,000
February, Kings County, NY $11,500,000 December 2000, New Haven, CT $30,000,000
April, Orange County, CA $10,952,696 July 2000, Cuyahoga County, OH $23,500,000
October, Beaumont County, TX $10,900,000 September 2000, Philadelphia County, PA $22,400,000
Source: Jury Verdict Research and West Law.
Financial Results
Factors contributing to the rising trend in medical
malpractice liability awards and settlements
■ Rise in public distrust of the medical profession and publicity about the
number of medical errors
■ Public believes standards are declining, though actual malpractice is relatively
rare
■ Growth in patient advocacy and the popularity of patients rights bills
■ Overall, the public is very strongly in favor of specific consumer protections
■ According to a Kaiser survey*, 70% of those consumers surveyed think patients
should be able to sue a health plan for malpractice
■ Changes in the judicial environment
■ Easier to litigate and find counsel
■ Well funded and savvy plaintiff’s bar
■ Advent of managed care
■ Focus shifted from committed medical acts to omitted medical acts (i.e., refusal
to treat and failure to diagnose)
■ Failure to diagnose breast cancer is now a leading cause of malpractice claims**
■ Loss of “intimacy” between doctor and patient
■ Primary care physicians pushed to see more patients
■ Expectations changed
*Source: Kaiser Family Foundation Public Opinion Update (Document No. 1500) 2001.
**Source: Physicians Insurers Association of America (PIAA) claims report.
2001 results deteriorated significantly, as the
industry took the opportunity to strengthen
reserves
Direct Combined Ratios — Medical Malpractice
Coverage Years 1996 – 2004
Reported results
150% 143% 145% 142% 143%
138% 137% Forecasted results
127%
115%
107% Breakeven
100% 113%
50%
0%
1996 1997 1998 1999 2000 2001e 2002f 2003f 2004f
Source: Historical results: Annual statement, Exhibit of Premium and Loss (statutory page 14 data).
Projected results: Tillinghast analysis of industry press reports, A.M. Best data and market experience.
Key success factors
■ Affinity
■ Home field advantage
■ Knowledge of medical providers
■ Knowledge of venues/rules
■ Access to defense counsel of choice
■ Politically active
■ Access to regulators
■ Access to brokers that understand the business
■ Proactive risk management culture in health system
■ Buy-in by senior management
■ Buy-in by medical staff
■ Aggressive claims handling
■ Commitment to defend
■ Pool of experts
■ Get price right
